Review Questions on Negotiable Instruments Law

Review Questions on Negotiable Instruments Law

1. What is a Negotiable Instrument? 2. What are the requisites for the negotiability of the instrument? WUPOA 3. What does negotiation means? P6 4. When Negotiability Ends? P6 5. What LAW governs the Negotiability of the instrument? 6. What LAW that will govern if the instrument is not negotiable? 7. What countries in which the judicial decisions of their courts can be applied in the Philippines in so far as it concerns on NIL? 8. What are the functions of the Negotiable Instrument? OMFI 1. It operates as the substitute for money; 2. It is a means creating and transferring credit; 3. It facilitates the sale of goods; 4. It increases the purchasing medium in circulation. 9. Is Negotiable Instrument a Legal Tender? 10. What is a Legal Tender? It a currency that is valid for the payment of a debt which must accepted by the creditor. 11. Under Philippine Law, what are valid legal tenders? 12. Give the corresponding amount of the coins that are considered legal tender in the Philippines. 13. What are the 2 important features of a Negotiable instrument? P8 14. What are the kinds of Negotiable Instruments? 15. What is a BILL OF EXCHANGE? 16. What is a PROMISORY NOTE? 17. What are the kinds of Bills of Exchange?

a. Draft-is synonymously refers to a Bill of Exchange, although, it normally refers to a Bill of Exchange used in documentary exchange like Letters of Credit transactions. b. Inland and Foreign Billc. Time draftd. Sight or Demand Draft- is a Bill payable upon presentment. e. Trade Acceptance- Bill that is used in contracts of sale where the seller as a drawer orders the buyer (as drawee) to pay a sum certain to said seller. . Bankers Acceptance- a time draft which across the face thereof, the word “accepted” is written by the bank. g. Check18. What are the kinds of Promissory Notes? a. Certificate of Deposit-a form of promissory note which a written acknowledgment of a bank of its receipt of certain sum with a promise to repay the same. b. Bonds- is a certificate of indebtedness whereby the company or the government body promises to pay the bondholders a specified amount of interest for specified length of time, and to repay the loan at the expiration date. c. Debenture- is a promissory note or bond backed by the general credit of a corporation and usually not secured by a mortgage or lien on any specific property 19. What are the instances when a bill maybe regarded as a promissory note? DDDI 20. Distinguish Promissory note from a Bill of Exchange. A;what contains, b; number of parties c; who is primarily liable d; number of presentment

21. Distinguish Bill of Exchange from a Check. A; where it is drawn or funds to the drawee b; In a Bill of Exchange Death of the drawer of a bill with knowledge of the bank, does not revoke the authority of the banker to pay whereas a in a check, Death of the drawer, with knowledge to the bank revokes the authority of the banker to pay c; when maybe presented? 22. Are the following commercial papers Negotiable? a. Crossed Check; b. Trade acceptance; c. Money Order;-an order for specific sum of money, usually purchased with cash at a bank or post office that can be used for payment. d. A warehouse receipt; e. A pawn ticket-represent an article . Treasury warrant; payable out of a particular fund. g. Bill of lading; h. Trust receipt; evidenced of ownership of goods 23. Who are the persons involved, a. For Promissory Note; b. For Bill of exchange. 24. Who is a referee? A Person who may be designated in the instrument as the person who may be resorted to by the parties in case of dispute. 25. Distinguish Negotiable Instrument from Non-Negotiable Instrument, as to; a. What law govern? b. As to the manner of transfer; c. Rule on assignee/holder; 26. Distinguish Negotiability from Assignability.

a. In assignment, the transferee can have no better right than his transferor simply because he merely steps into the shoes of the latter, while in negotiation, the transferee may have a better right than the transferor especially if he is a holder in due course. b. In assignment, the transferee has no right of recourse against intermediate parties while in negotiation, the holder can hold the drawer and the indorsers liable if the party primarily liable does not pay. 27. Distinguish Negotiable Document of Title from Negotiable Document. As to subject matter, as the property itself, as to existence of the requisites enunciated in Sec.1, NIL, as to liability of intermediate/secondary party, as to the nature of holder. 28. Give the form of Negotiable Instrument. Sec. 1 NIL 29. What is the rule on signature? The signature need not be the usual signature of the maker/drawer/indorser, but enough if the letter or symbol is intended by the latter to authenticate the instrument. 30. What are the words equivalent to “promise” or “order”? a. “payable on demand” b. “due …. c. “I acknowledge myself to be indebted to the order of Juan the amount ___ to be paid on demand”…. 31. As a rule, the “order” or “promise” must be unconditional. What are the instances when the same is CONDITIONAL?  When payable out of a particular fund;  When payable upon a contingency.

32. What are those instances that although, they are present, but the instrument remains to be unconditional?  When there is an indication of a particular fund, out of which a reimbursement is made.  A statement of transaction which gives rise to the instrument. 33. Distinguish indication of a particular fund for payment against Fund for reimbursement

FUND FOR INDICATING REIMBURSEMENT PARTICULAR FUND A. (1) The drawee pays There is only one actthe payee from his own the drawee pays directly funds afterwards the from the particular fund drawee pays himself indicated. from the particular fund B. Particular fund The particular fund indicated is not the indicated is the direct direct source of source of payment. payment 34. What are the instances that although there are additional provisions inserted in the instrument but still it retains the negotiability of the instrument and the sum remains to be certain in money? Sec. 5, NIL a. Authorizes the sale of collateral securities in case the instrument is not paid upon maturity b. Authorizes a confession of judgment in case the instrument be not paid at maturity;

c. Waives the benefit of any law intended for the advantage or protection of the obligor; or d. Gives the holder an election to require something to be done in lieu of the payment of money. 35. What are the instances that although there are additional undertakings or words inserted but the instrument remains to be payable in the sum certain in money? Sec. 2, NIL a. with interest b. by Stated instalment c. by stated instalment, with the provision that upon default in payment of instalment or interest, the whole amount shall become due (acceleration clause); d. With exchange, whether fixed rate or a the current rate; e. With costs of collection or an attorneys fee in case payment is not made at maturity. 36. What is meant by stated instalment? 37. When may an instrument payable on demand?Sec. 7, NIL  When it is so expressed to be payable on demand or at sight, or on presentation; or  When no time of payment is expressed;  Where the instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. 38. When is an instrument payable at a fixed or determinable future time?Sec. 4, NIL a. At a fixed period after date or sight; b. On or before a fixed or determinable future time specified therein;

c. On or at a fixed period after the happening of the specified event which is certain to happen, although the time of happening be uncertain. 39. What are acceleration, insecurity and extension clauses? What happen to the instrument if they are inserted thereto?  Acceleration clause- when there is stated instalment and there is additional provision that provides that in case of default for the payment of instalment or interest, the whole amount shall be deemed due….the instrument remains to be negotiable  Insecurity clause- is an additional provision that allows the holder to accelerate payment on the instrument if he deems himself insecure….the instrument is rendered nonnegotiable.  Extension clause-the instrument is payable at a definite time subject to extension at the option of the maker or acceptor….the instrument is still negotiable 40. What is the effect if the instrument is payable to specified person or entity? 41. When is the instrument payable to Bearer? Sec.9, NIL a. When it is expressed to be so payable to bearer; b. When it is payable to person named therein or bearer; c. When it is payable to the order of a fictitious or nonexisting person; d. When the name of the payee does not purport to be the name of a person; e. When only or the last indorsement is an indorsement in blank.

42. What are the two (2) ways by which the instrument can be payable to order? Sec. 8, NIL  When the instrument is payable to the order of the specified person; or  When the instrument is payable to the specified person or his order 43. When the instrument is payable to cash or order, what does it connotes? The instrument is payable to bearer. 44. If there are 2 or more drawees, what should be done in order that the instrument remains to be negotiable? The bill should be addressed to them jointly not as in alternative. 45. What are the omissions and provisions that do not affect the negotiability of the instrument? Sec. 6, NIL ….DVPBDA The validity and negotiable character of the instrument are not affected by the fact that; 1. It is not dated; 2. Does not specify the value given; 3. Does not specify the place where it is drawn or the place where it is payable; 4. Bears a seal; 5. Designates a particular kind of current money in which payment is to be made; 6. Addressed to more than one drawee jointly 46. What is an instance when date should be inserted by the holder? P.24 47. What are the two ways to transfer a negotiable instrument?

48. In what manner a non-negotiable instrument maybe transferred? 49. What is the effect if the instrument is merely assigned? The transferee does not become a holder thereof, but he merely steps into the shoes of the transferor, henceforth, any defense available to the transferor is available to the transferee. 50. What is “issue” or “issuance”? Sec. 191, NIL….It is the first delivery of the instrument complete in form to the person who takes it as a holder. 51. What signifies the issuance of the instrument to the payee? It is negotiation because the transfer constitutes the payee the holder of the instrument. When can he be considered a holder in due course? 52. What is meant by delivery? The transfer of possession of the instrument by the maker or drawer with the intention of transferring the title to the payee and recognize him as the holder thereof. 53. What is negotiation? It is the transfer of the instrument form one person to another in such a manner to make the transferee the holder thereof. 54. How to effect negotiation if the instrument is; a. Payable to Bearer; or b. Payable to Order. (Indorsement plus delivery) 55. What is the nature of a bearer instrument? A bearer instrument always a bearer instrument….it may, however be negotiated by special indorsement, but it may nevertheless be further negotiated by delivery. Any person indorsing the same specially is liable as indorser to only

such holders who derived their title through such indorsement. 56. What is the effect if an order instrument is negotiated without indorsing the same (INCOMPLETE NEGOTIATION)? Sec. 49, NIL….The transfer vests in the transferee such title as the transferor had therein (same as assignment), and the transferee acquires in addition, the right to have the indorsement of the transferor. 57. Where should indorsement be placed? Sec. 31, NIL a. On the instrument itself; or b. On separate piece of paper attached to the instrument called “allonge” 58. What is the manner of indorsing an instrument? The indorsement must be the entire instrument, except when there was previous payment. 59. What are the kinds of indorsement? 60. What is a qualified indorsement? 61. Give the instances when indorsement is restrictive? 62. What are the rights of the restrictive indorsee? RBT 63. What is the effect if the instrument is negotiated back to a prior party? Sec. 50, NIL a. Such party may reissue and further negotiate the instrument; b. But he is not allowed to enforce payment from the intervening parties, to whom he was personally liable; c. He is allowed to strike out the intervening indorsement because they are not necessary to his title, and he is liable to them because of his initial indorsement. 64. Who is a holder of an instrument? Sec. 191, NIL

The payee or indorsee of a bill or a note who is in possession of it or the bearer thereof. 65. Give the requisites of a Holder in due course. Sec. 52, NIL 66. What is the effect if an instrument payable on demand is negotiated after unreasonable length of time? The holder is not deemed the holder in due course. Sec. 53, NIL. 67. What is “unreasonable time” with regard to negotiation of the instrument? It is a question of fact, which should be interpreted with due regard to the usage of trade or business with respect to the instrument. 68. What is meant by infirmities in the instrument? 69. Give the instances where there are defects in the instrument. Where there is notice of alteration in the instrument which is apparent; Notice of forgery in the maker or the drawer’s signature. 70. When is there defective title in the instrument? 71. What is the rule on good faith in taking the instrument? Good faith is presumed. It is destroyed when the holder acquires it under circumstances that would put him to inquiry as to the title of the transferor. 72. What is value, with regard to the instrument? It is a consideration sufficient to support a simple contract. These include antecedent debts and lien on the instrument. 73. Who is a holder for value? One who holds the instrument in exchange of valuable consideration sufficient to support the execution of the instrument. 74. What are the rights of the HOLDER IN DUE COURSE?

 He holds the instrument free defect of title of prior parties;  He holds the instrument free from personal defences of prior parties;  He can enforce the instrument up to its full amount against all parties liable thereto. 75. May one who fails to inquire as to an infirmity in a negotiable instrument and defect in the holder’s title, be a holder in due course? 76. Enumerate the Real and Personal defences in the instrument. REAL DEFENSES 1. Minority (available only 1.to the minor) 2. Forgery 3. Incomplete Undelivered instrument 4. Material Alteration

PERSONAL DEFENSES Failure or absence of consideration 2.Illegal Consideration 3.Complete undelivered instrument 4.Conditional delivery of complete instrument of 5.Fraud in inducement

5. Ultra Vires Act Corporation 6. Fraud in factum or esse contractus 7. Illegality-if declared void for any purpose 8. Vicious force or violence 9. Want of authority

6. Filling up blank not within authority 7. Duress or intimidation 8. Filling up blank beyond reasonable time 9. Transfer in breach of faith

10. Prescription 10. Mistake 11. Discharge in insolvency 11. Insertion of wrong date 12. Ante-dating or Postdating for illegal or fraudulent purpose. 77. Distinguish real defense from personal defense. 78. When is there forgery? 79. Give the effect in case of forgery in the signature of the maker or indorser of the instrument. 80. What are the rules with respect to forgery of instrument?  Only the forged signature is wholly inoperative, not the instrument itself and not the genuine signatures  Parties prior to forgery can also avail the real defense of forgery;  Despite of forgery, the following parties are precluded from setting up the real defense of forgery; a. Those who warrant the instrument; b. Those who ratify the forgery; c. Those who are negligent. 81. Discuss the meat of Section 14 of NIL. a. The person who holds the instrument wanting in material particular has the prima facie authority to complete it; b. The person who is in possession of a paper containing a blank signature delivered by the person making such signature with the intention of converting it to a NI, has the prima facie authority to fill it up for any amount; c. In both of the foregoing, in order that the instrument maybe enforced against parties prior to the completion must be filled up strictly in accordance with the authority given.

d. Persons who became parties to the instrument after the completion is liable to the instrument of his warranty. 82. What is the effect if the instrument is not dated? 83. What is Section 13 of NIL? The insertion of a wrong date will not avoid the instrument in the hands of the subsequent holder in due course, but as to him the date so inserted is to be regarded as the true date. 84. What is Material alteration? 85. When is there Material alteration? DST-NMAA Any alteration which changes the following: a. Date; b. Sum payable; c. Time and place of payment; d. Number or relation of parties; e. Medium or currency of payment; . Adds a place of payment where non is specified g. Alters the effect of the instrument. 86. What is the effect if there is material alteration?  Material alteration is a real defense;  It avoids the instrument except as against the party who made, authorized, or assented to the alteration and subsequent indorsers. 87. What is Fraud in Factum or Esse contractus? Literarily means “FRAUD IN EXECUTION”. This is present if the person is induced to sign an instrument not knowing its character as a note or a bill. The person signing the instrument does not know that he is signing a negotiable instrument. This is a REAL DEFENSE.

88. What is “Fraud in inducement”? The person who signed the instrument knows that it is a negotiable instrument, only that, he was induced to sign it through fraud. In otherwords, his consent to sign the NI was vitiated by fraud. THIS IS A PERSONAL DEFENSE only. 89. NOTE: Absence or failure of consideration is only a personal defense while illegal consideration is a real defense if the statute declares the instrument void for any purpose 90. What is the effect to the instrument if there is failure, absence or illicit/illegal consideration? If there is absence of consideration in the instrument issued, the same would avoid the instrument, however, it is only a personal defense. With respect to illegality of consideration, it is a real defense if the statute would declare the instrument illegal or void for any purpose. 91. What is the effect, in case of minority, incapacity or want of authority? Minority or incapacity is a real defense, but only minors and incapacitated person can avail said defense. Capacitated persons cannot invoke the defense of minority or incapacity because such defense is personal to minors and incapacitated persons. Instruments issued as an “ultra vires” act of the corporation is a real defense. 92. What kind of defense is the Statute of limitations/prescription? When does the right to file claim arising from the instrument prescribed?

Prescription is a real defense, that is, available even to holder in due course. The prescriptive period to file claims arising from the negotiable instrument is the (10) from the cause of action accrues.

PERSONS primarily and SECONDARILY LIABLE TO THE INSTRUMENT 93. Give the classification of the parties according to their liabilities: PRIMARILY LIABLE: a.The maker of the promissory note; b.The acceptor of a bill; c. The certifier of a check SECONDARILY LIABLE a.The drawer of a bill; b.The indorser of a note or bill. NOT LIABLE: -THE DRAWEE UNTIL HE ACCEPTS THE INSTRUMENT IN WHICH CASE HE BECOMES AN ACCEPTOR. 94. What is the liability of the maker? Primarily liable; 1.Engages to pay according to the tenor of the instrument; 2.Admits the existence of the payee and his capacity to indorse. 95. What is the liability of the ACCEPTOR (and the drawee that pays the instrument without accepting it)? Primarily liable:

1.Engages to pay according to the tenor of his acceptance; 2.Admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument; 3.Admits the existence of the payee and his capacity to indorse 96. What is the liability of the drawer? SECONDARILY LIABLE: 1.Admits the existence of the payee and his capacity to indorse; 2.Engages that the instrument will be accepted or paid by the party primarily liable; 3.Engages that if in case dishonoured and proper proceedings are brought, he will to the party entitled to be paid. Warranties

97. What are the warranties of a qualified indorser and persons negotiating by delivery? 1.That the instrument is genuine and in all respects what it purports to be; 2.that he has a good title to it; 3.That all prior parties had capacity to contract; 4.That he has no knowledge of any fact which would impair the validity of instrument or render it valueless;

98. What are the warranties of General Indorser?

1.That the instrument is genuine and in all respects what it purports to be; 2.that he has a good title to it; 3.That all prior parties had capacity to contract; 4.That the instrument is, at the time of the endorsement, valid and subsisting. 99. Define accommodation and accommodated party and give the liability of the accommodation party? An ACCOMMODATION PARY is one who signed the instrument as maker, drawer, acceptor, or indoser without receiving any consideration and for the purpose of lending his to another party. An ACCOMMODATED PARTY is a party in whose favour the instrument is issued

An ACCOMMODATION PARTY is liable to holder for value, even if such holder knew that the party was an accommodation party when he took the instrument. How to enforce liability:

100. When is the maker or drawer liable to the instrument? The maker is liable to the instrument the moment is makes the same, because Sec. 60 provides that the maker by making the promissory note “engages to pay the instrument according to its tenor”. The DRAWEE becomes liable the moment he accepts the instrument. Section 62 provides that the “acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance”. 101. State the instance when the indorser or person secondarily liable to the negotiable promissory note becomes liable. The party secondarily liable becomes liable under the following: 1.Presentment for payment must be made within the required period to the maker; 2.Notice of dishonor should be given, if promissory note is dishonored by non-payment of the maker. 102. Give the steps in charging the secondary party in Bill of Exchange. 1.Presentment for acceptance or negotiation within a reasonable time after it was acquired— however presentment for acceptance is necessary only in the following instances: (SEC. 143, NIL)

(a.) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument or, (b.) When the bill expressly stipulates that it shall be presented for acceptance; or (c.) When the bill is drawn payable elsewhere than at the residence or place of business of the drawee. 2.If dishonored by non-acceptance, the following shall be observed: (i) Notice of dishonor should be given to the indorsers and drawer; (ii) If the bill is a foreign bill, there must be protest for dishonor by non-acceptance. 3.If the bill is accepted: (i) Presentment for payment to the acceptor should be made: a.If the bill is dishonored upon presentment for payment. b. Notice of dishonor should be given to party/parties secondarily liable. c.If the bill is a foreign bill, protest for dishonor by non-payment must made. 103. When to charge the acceptor for honor and referee in case of need? -Protest for non-payment by the drawee. Sec. 165. Agreement of acceptor for honor.—

The acceptor for honor, by such acceptance engages that he will, on due presentment, pay the bill according to the terms of his acceptance, provided it shall not have been paid by the drawee and provided also that it shall have been duly presented for payment and protested for nonpayment and notice of dishonor given to him. 104. Give the rules for presentment for payment.  GENERAL RULE: Presentment for payment is not necessary to charge persons primarily liable. But it is necessary to charge persons secondarily liable, except under the following 1. As to the drawer, under Section 79, where he has no right to expect or require that the drawee or acceptor will pay the instrument; 2. As to indorser, under section 80 were the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented;

3. When dispensed with under section 82, such as: (i) where, after the exercise of reasonable diligence, presentment cannot be made; (ii) where the drawee is a fictitious person; (iii) by waiver of presentment, express or implied; 4. When the instrument has been dishonored by nonacceptance. 105. What are the requisites for a valid presentment for payment? a.Presentment must be made by the holder or person authorized to receive payment on his behalf; b.It must be made on a reasonable hour of business day; c.It must be made at the proper place; d.It must be made to the person primarily liable or to any person found in place where the presentment was made; e.The instrument must exhibited and must be delivered to the person paying the same upon payment.

106. Presentment for payment of the instrument must be made at a reasonable time. What is meant by reasonable time?  REASONABLE TIME- refers to time as a reasonable, prudent and diligent man do conveniently , what the contact or duty requires should be done having a regard for the rights and possibility of loss, if any, to the other party.  CHECKS- presentment for payment must be made within 6 months or 180 days. 107. When is presentment for acceptance mandatory?  Where the bill is payable within fixed period after sight; or where acceptance is necessary to fix the maturity of the instrument.  Where the bill expressly stipulates that it shall be presented for acceptance;  Where the bill is drawn payable elsewhere than the residence or place of business of the drawee. 108. What are the instances when presentment for acceptance is excused?

Where the bill is drawn payable elsewhere than the residence or place of

business of the drawee and the holder with the exercise of reasonable diligence failed to present the instrument. What is excuse here is the delay in presenting the instrument caused by presentment for acceptance.

Where the drawee is dead, or has absconded, or is fictitious person or a person not having capacity to contract by bill.

Where after the exercise of reasonable diligence, presentment cannot be made.

Where, although presentment has been irregular, acceptance has been refused on some other ground. 109. What is meant by acceptance? It is the signification of the drawee of his assent to the order of the drawer. 110. What are the requisites of acceptance? The acceptance must be in writing;

Signed by the drawee; The drawee assented to the promise to pay a sum certain in money and not by any other means. 111. In what form should the acceptance be made? The rule is that THE ACCEPTANCE SHOULD BE IN THE INSTRUMENT ITSELF OR IN SEPARATE INSTRUMENT. However, under section 133, the holder may require that the acceptance be made on the bill itself, refusal by the drawee, the holder may treat the bill as dishonored. 112. When is there deemed acceptance of the bill?  The drawee is deemed to have accepted the instrument:  The bill was delivered to the drawee and the latter destroys the same.  The bill was delivered to the drawee but the drawee refuses within twenty –four hours or within such other period as the holder may allow to return the bill accepted or non-accepted.(Sec. 137, NIL)

 NOTE: the drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation. (Sec. 136, NIL) Meaning the acceptance retroacts on the day of presentation. 113.

What is the effect of an